Exxon Mobil planning a party like it’s 1999

Stocks closed slightly in the red yesterday as investor anxiety about today’s employment numbers and their effects on bond yields was painted all over the tape. Everyone keeps expecting the labor market to cool, it hasn’t yet, and many are wondering if today may be different.

Blind curve. A colleague walked into my office the other day and inquired after the yield curve. “Ah,” said I, “I am glad that you asked,” as I grabbed a pencil and paper and prepared to draw. My colleague decided to get comfortable because he knew once I took up the pencil that the answer was not going to be a short one. His query was a timely one as bond… well bond yields at least… have become top of mind for just about everyone these days, and rightly so given their recent stark movements. Indeed, higher bond yields have certainly squelched the hopes of stock bulls who are now hunkered down for a bumpy Q4 and hoping for the best. They have also made it challenging for portfolio managers who are seeking diversification for their clients. By now, I am sure we are well aware of this, so today, I am going to briefly talk about the yield curve and what has been happening on that front. Heads up, it is going to be a 2-chart day, but bear with me.

For today’s discussion, I am going to focus on a specific portion of the yield curve between 2-year and 10-year Treasury Notes. Don’t get caught up in the details, just think of the yield curve as the difference in yield between 2- and 10-year Treasury Notes. In normal conditions, longer maturity bonds have higher yields to compensate investors for term premium. You are loaning your money for a longer period of time, so, naturally, you would expect to get more yield for the commitment. However, since summer of ’22 that “normal” has become abnormal with shorter maturity yields higher than longer maturity yields. Let’s not get into the whys for now but suffice it to say that economists get worried about that abnormal situation which is referred to as a “yield curve inversion.” If we look back to 1980, yield curve inversions have predated every recession and THAT is why alarm bells sound in economics departments of universities and investment banks when it happens. Now, to be clear, inversions don’t cause recessions, they simply reflect conditions which may be ripe for recessions, and in case you haven’t noticed… um. You know the old saying about “death and taxes,” well with economists you can also add “recessions.” They are unavoidable but the big question is “when,” and will this current inversion continue the trend of correctly predicting a recession. Take a look at the following chart and keep reading.

On this chart you can see the spread between 2y and 10y Treasury Note yields which went below the 0 line prior to each recession shown in the chart (red shaded areas). So, it should be clear that, currently, the curve is inverted and that is was actually QUITE inverted this last summer, getting below -100 a few times. For reference, it did get even more inverted a few times in late 1970s and early 1980s, but nowhere close since. By the way, there is no correlation between the level of inversion or the intensity and length of the recession that follows. So, the big 2-part question is a) will we have a recession and b) when? If you believe that the answer to part ‘a’ is “yes” then you may want to look more closely at the chart to get an answer to part ‘b’. Notice how the yield curve rapidly steepens just prior to recessions? Now you do! Now look closely at the right-hand side of the chart which is the yield spread from August’s lows through present. Take a look at the next chart and follow me to the finish line.

On this chart, you can see the yield curve as of this morning (green line on top) and the yield curve 6 months ago (dotted line on bottom). Clearly, the whole yield curve is higher as yields across the curve have risen with Fed tightening, hawk talk, and traders factoring in higher rates for longer. You may not notice it by looking at the top panel with the lines, but you will notice a discrepancy in the bottom panel with the bars. The bars graphically depict the difference between the two curves, and you will notice that the 10-year bar is much bigger than the 2-year bar. This indicates that the curve has steepened quite dramatically in 6 months. Wait, we have seen that before, haven’t we? Does that mean that a recession is closer? It is hard to say because recent volatility certainly suggests that yields and the curve can fluctuate quite a bit. Nonetheless a move from -100 basis points to -30 basis points in a little over a month is certainly noteworthy. I think that’s enough for a Friday. Pay attention to this morning’s employment figure, it won’t be a predictor of a potential recession, but it will be a predictor of where yields will go in the next few sessions… which CAN, as you now know, affect the shape of the yield curve, which may give us some clues.

THIS MORNING’S PREMARKET

Exxon Mobil Corp (XOM) shares are lower by -2.45% after The Wall Street Journal reported that it is in talks to acquire Pioneer Natural Resources for around $60 billion, making it the company's largest acquisition since 1999. Pioneer shares are up by +10.93% in the premarket. Dividend yield: 3.34%. Potential average analyst target upside: +14.5%.

Eli Lilly & Co (LLY) shares are higher by +0.94% in the premarket after BofA raised its price target to $700 from $600 stating that it is bullish on the progress with potential of its popular Mounjaro drug being approved for weight loss in addition to progress in a number of the company’s other products. Dividend yield: 0.83%%. Potential average analyst target upside: +7.3%.

YESTERDAY’S MARKETS

NEXT UP

• Change in Nonfarm Payrolls (Sept)  is expected to come in at 170k jobs, which is slightly lower than last month’s 187k print.
• Unemployment Rate (Sept) may have decreased to 3.7% from 3.8%.
• Next week: Earnings season officially kicks off on Friday with a slight ramp-up. Additionally, we will get inflation numbers, FOMC Meeting Minutes, and University of Michigan Sentiment. The doesn’t seem like much but it will keep you quite busy next week… you can count on that. You can also always count on weekly calendars with times and details showing up on the first day of each week, so check back in then and download calendars.